Credit Cards

[nodnub]

Bookie you are quite correct in that 29%+

 

Another thing that differs from most retail credit is that if you charged $2500 this month and pay only $2000 before the due date, than you will be charged interest on the $500 remaining. But with a credit card you may pay interest on all the charges that make up the full $2500 from the day you charged them until the end of the month of the charges. (unless policies have changed in the past few years)

 

I also find it surprising that a lot of people do not realize that most retailers are charged approximately 2-5% of every charge processed by a bank charge card. However, the real cost to the retailer is actually higher because the charge includes 15% or sales tax. The retailer must submit 100% of the sales tax to government even though they only receive 95-98% of that money from the bank. One place where this all gets very substantial is in the building supply industry where people run up six figure accounts and then demand to pay with their credit card. One swipe of the card can cost the retailer several thousand dollars.

 

I agree most customers have no idea of how high these processing fees are.  I also think that a lot of small business owners don't completely understand the fees they pay either.

[vinod1]

Credit card companies business model does not work on the subset of people who are very knowledgeable in finance and are disciplined like you. This however is a good statistical bet for the company across the broader population. What proportion of the people would pay on time say 36 consecutive times (just in the first three years)? I would bet a decent chunk of people would end up paying high rates.

This isn't quite true; it depends on the facet of the credit card business that you looking at.  Visa and Mastercard make their revenues based on transactions, not based on balances. 

 

It's primarily banks and retail locations (think The Home Depot Card or The Macy's Card) that make their big bucks off of those who don't have a strong understanding of compound interest.  Pure-play credit card businesses such as Capital One and American Express are also directly exposed to this segment of borrowers.

 

Regardless, all players take a cut of transactions executed.  So even if their customers get wise (as they should), they will still make very nice revenues on the transactions side.  Not as amazing as the retail loans business, but still nice.

 

I do not even think of Visa and Mastercard as credit card companies. I am referring to the card issuing lines of business like Capital One's US Card segment where most of the money is made on the spread and various fees/charges. The cut from executing each transaction mostly is balanced via rewards so this alone makes up only a small fraction of the revenues.

 

Thanks

 

Vinod

[cwericb]

I don't know if everyone gets the same ads running at the bottom of these pages, but it is more than a little ironic that an Amex ad has been running at the bottom of my page on this thread telling people that they can accumulate Aeroplan points if they apply for an Amex card.

[vinod1]

Capital One had $500 million in interchange fees on about $13 billion in revenue in 2009.

 

Vinod

[Guest VAL9000]

I do not even think of Visa and Mastercard as credit card companies. I am referring to the card issuing lines of business like Capital One's US Card segment where most of the money is made on the spread and various fees/charges. The cut from executing each transaction mostly is balanced via rewards so this alone makes up only a small fraction of the revenues.

Interesting.  I hadn't really given much thought to how the rewards are accounted for.  So I guess by implicitly paying for my reward with each transaction, I'm really not gaining anything at all.  I'm just moving my own money to improve Aeroplan's business.  But then, I guess I'm gaining more than if I just had a regular no-rewards card.  Too bad there wasn't an option for "give me no rewards but give me lower transaction fees".

[vinod1]

Interesting.  I hadn't really given much thought to how the rewards are accounted for.  So I guess by implicitly paying for my reward with each transaction, I'm really not gaining anything at all.  I'm just moving my own money to improve Aeroplan's business.  But then, I guess I'm gaining more than if I just had a regular no-rewards card.  Too bad there wasn't an option for "give me no rewards but give me lower transaction fees".

 

That is exactly the argument merchants like Warmart's make. The card companies and payment processors (visa, mastercard) do not agree which reminds me of a quote: Man is incapable of understanding any argument that interferes with his revenue.

 

Vinod

[nodnub]

I do not even think of Visa and Mastercard as credit card companies. I am referring to the card issuing lines of business like Capital One's US Card segment where most of the money is made on the spread and various fees/charges. The cut from executing each transaction mostly is balanced via rewards so this alone makes up only a small fraction of the revenues.

Interesting.  I hadn't really given much thought to how the rewards are accounted for.  So I guess by implicitly paying for my reward with each transaction, I'm really not gaining anything at all.  I'm just moving my own money to improve Aeroplan's business.  But then, I guess I'm gaining more than if I just had a regular no-rewards card.  Too bad there wasn't an option for "give me no rewards but give me lower transaction fees".

VAL,

 

By using a rewards card you are still gaining something relative to no-reward card users and cash buyers, all of whom pay the same price as you, but get no rewards.  

Did you know the merchants pay a lower fee for customer transactions with no-reward cards? The rewards recieved by gold card users have a cost, which the cc passes to the merchant in higher fees for gold card transactions. but the merchant does not pass the higher fees onto the gold card users alone... those costs are recovered through higher prices, affecting all customers.  So in most businesses, the customers using cash or non-rewards cards are subsidizing the rewards that gold-cardholders receive.

 

The pathetic thing about Aeroplan or gold reward cards is that the merchant is charged a fee of perhaps 3.5% or higher for the transaction, but the customer reward benefit is only equivalent to about 1% of each dollar spent. Overpriced rewards items, flight booking restrictions, and time wasted looking through these reward catalogues etc, further reduces the value of the rewards.  If you have to pick rewards items from a catalogue, I've calculated that most of the "rewards" are valued at twice as much as they are on amazon.com.  The implied points value of the reward items is also more expensive than in local retailers.

 

If you use a rewards card, in my opinion it's better to stick with a card that offers cash back so you can stop wasting time with all of flight restrictions or overvalued crappy rewards programs.

 

[Guest VAL9000]

I don't know if everyone gets the same ads running at the bottom of these pages, but it is more than a little ironic that an Amex ad has been running at the bottom of my page on this thread telling people that they can accumulate Aeroplan points if they apply for an Amex card.

 

I get the same thing.  It's no coincidence, though.  Google's AdSense service performs contextual analysis of the web pages that it serves its ads on.  Terms like "credit card" and "rewards" in the body of this thread are probably getting Google to serve up this ad.  Equally humorous is the thread about shorting CRM - it's displaying SalesForce.com ads :)

[Aberhound]

I am surprised that such a smart group of people on this board use credit cards at all since you all know of Munger's warnings about human psychological weaknesses which we exploit in our investment choices. Studies show that merely using a credit card increases your spending on average by 20%.

 

Some of you might also reject using the credit card for religious or moral reasons. Since the banks create the money out of thin air which the credit card users then spend as purchasing power, where do you think the purchasing power comes from? The purchasing power credit card users spend comes from your neighbours in the form of debasement of the currency. This means that by using the credit card you are stealing a little bit from your neighbours. If you intend to comply with the 10 commandments I don't see how you can use credit cards. Fortunately in this case being moral or religious leaves you better off financially as not using the credit card will mean that you have more to save and invest and being more cognizant of the one's own psychological weaknesses makes you a better investor.

[Guest VAL9000]

I don't use the credit part of the credit card.  Just the card as a convenience tool.  Boosting my spending by 20% isn't really going to move the needle all that much.  We try to run a tight ship at our house.

 

Plus, as nodnub pointed out..  I'm better off getting rewarded for my CC charges than I am paying cash.  I do nearly 100% of my day-to-day purchases using a CC.

 

Aberhound, do you not use a credit card?

[ubuy2wron]

If you use a rewards card, in my opinion it's better to stick with a card that offers cash back so you can stop wasting time with all of flight restrictions or overvalued crappy rewards programs.

 

You are of course right. But the guys who created loyalty programs are smarter than you think. In Canada there are realy only two airlines and until recently only one offered a rewards program Air Canada this rewards program was spun into a company when AC went broke a few years ago and emerged as a number of separate entities involved in Airplane services the rewards program etc. In Canada if you are business travelor it is extremely likely you are going to be using Air Canada even if you are not that happy with the carrier there are after all only two carriers, hence the rationale of collecting cash points to purchase a flight means you may end up with stranded points etc. with Air Canada there is some utility in having all of your points with one airline. The points biz is a good biz it is worth while understanding it because I think the business is going to get bigger over time Aeroplan may become the 800 lb goriila in the space and I think its a biz that Amex may want to own some day especially if the number of carriers in the US mkt place continues to decline.

[Uccmal]

oec2000 said "In fact, we should make mutual fund companies and financial advisers give warnings to the effect that studies show that most active managers underperform their benchmarks and that unless they (the mutual fund companies, etc) can provide proof of long term outperformance, clients should assume that they too, will underperform. "

 

That would sure kill and industry...  Never mind the damage it would do to my shares of SLF, MFC, PWF, WFC, and BAC

IMHO most people dont really care.  They sock away money in RRSPs, or the US equivalent and hope for the best.  They spend all of 1 hour a year working on it.  People do the same thing when buying cars.  How else would you explain GM or Chrysler selling a single vehicle.  Maybe Chrylsers  should come with a warning too:  "This car is badly made and will cost you a fortune in time and money to keep up - buy a Hyundai instead."

 

RE: Credit Card rates - part of the reason for the extortion rates is the high level of default.  Look at the income statement of any of the major banks.  20% of their income +/- comes from credit cards - the default rate can run as high as 5%.  

 

Does anyone actually think that warning people about credit card rates will slow down the usage?  

 

It appears that if the economy were perfectly efficient and run by value investors a large portion of the population would be out of work.  

 

 

 

[Uccmal]

My own card story - this past year.  I have only ever had one card, TD Visa, that I use regulary and payoff monthly.  Then last summer we bought a pile of furniture at Sears.  To get various discounts, 3 months interest free, and Sears points, I got a Sears Card.  We made our purchases.  We made a second tranche of purchases and I paid off the first and saved a bucket of money on the second purchase.  All fine and dandy, and then life got busy, and I missed one of the Sears bills, and ended up paying 29%/12 on the outstanding, which essentially negated all of the savings I had to that point. 

 

So that's the end of the Sears Card for me.  Too much complexity to keep track of more than one card.  The Visa with no discounts will do just fine. 

[beerbaron]

Anybody in Canada should take a loot at MBNA Smart Cash. It gives back a nice amount in checks.

 

I believe if credit card did not exists everybody would be better but since we don't live in a perfect world. I decided to use them as tools for my own advantage.

 

I really don't see how having a credit card can increase my spending and I would doubt anybody on this board would too. Money burns the hands of many person but there is a small part of population that is actually net savers, what burns them is spending their hard work in useless crap.

 

You can't help people that don't know how to manage their money, you just can't. Accept it and stop trying to pop their bubble that they are equals to Prince Charles in wealth. Debt is like a drug, you take more of it to forget about you debt problems.

 

I like that governments force the extra disclosure, I actually laughed last month when I read it would take me 12 years to pay back a 1000$ credit card bill. It probably made some people cry too, but not the ones most concerned!

 

BeerBaron

[Aberhound]

I don't use the credit part of the credit card.  Just the card as a convenience tool.  Boosting my spending by 20% isn't really going to move the needle all that much.  We try to run a tight ship at our house.

 

Plus, as nodnub pointed out..  I'm better off getting rewarded for my CC charges than I am paying cash.  I do nearly 100% of my day-to-day purchases using a CC.

 

Aberhound, do you not use a credit card?

No I do not use a credit card. I stopped using them in 2003 when I was in my early 40s and I have been far better off ever since. You spend less, you have more to invest and you become a better investor. I was greatly influenced by Prem's and Munger's writings. I suggest reading A Great Depression Diary by Benjamin Roth and follow his advice: sell assets during the boom, spend less, pay off debt and accumulate cash so you are in a position to invest in hard times. Instead of a credit card you can get a debit card with the Mastercard insignia for the purpose of renting cars and booking hotels. Avoid the points because they are part of the trick to fool you into spending more.

[FFHWatcher]

Suggestion: Link your credit card to your bank account and direct your credit card company to take the entire balance owing on the payment date.  No more interest.  If you don't have enough money in your bank account to cover the entire balance due on your credit card than you probably shouldn't have a credit card.  IMO.